Extra-large, please

CORPORATIONS ARE ALWAYS working to improve efficiency and decrease the costs of its supply chains. For the industrial sector, the recent result is that many companies are consolidating regional distribution networks into centers of mind-boggling size.

For example, Sweetheart Cup, a restaurant supply company, recently moved into a 1 million sq. ft. distribution center located in a former cornfield in Hampstead, Md. The building offers 32 ft. clearances and 85 dock doors. It sits on a 140-acre site that will accommodate three more planned buildings, adding 800,000 sq. ft. to the project. Sweetheart's move has consolidated five smaller mid-Atlantic distribution facilities.

These kinds of distribution centers not only provide a substantial savings in its distribution operation, but they also increase efficiency by eliminating steps in the distribution chain.

John Seiple, president and COO of North America for Aurora, Colo.-based ProLogis Trust, an industrial owner and developer with a global portfolio of 200 million sq. ft., notes that these extra-large facilities are not unusual in today's marketplace. “Most of what we are working on today are 500,000 sq. ft. to 1 million sq. ft. buildings,” Seiple says.

Changing distribution networks

About 15 years ago, Corporate America was concerned about goods moving too slowly from factory to consumer. “It took two weeks to move goods from a warehouse in Atlanta to the West Coast,” says William Linville, midwest region executive vice president for Duke Realty Corp. in Indianapolis. “But customers wanted the goods sooner, by the next day if possible.”

So corporations built networks of 10 to 20 distribution centers, with individual centers serving areas of one to three states. Such networks allowed same-day delivery, but skyrocketed labor and inventory costs through the roof as each warehouse needed a staff to manage the movement of goods.

To reduce costs, corporations brought in logistics consultants and service providers that squeezed costs out of the supply chain over the past decade. At the same time, logistics companies, or third-party logistics suppliers, have become important tenants for owners of distribution facilities. For example, ProLogis leases 15% of its U.S. space and 50% of its European space to third-party logistics suppliers.

Linville notes that Duke Realty recently built two 500,000 sq. ft. distribution centers for Epson, a computer supply company. Epson consolidated 20 smaller facilities of approximately 40,000 sq. ft. each into two new centers located in Indianapolis and Portland, Ore.

Duke Realty also built a 500,000 sq. ft. distribution center for Little Brown Publishing in Indianapolis. With the new center, the company was able to consolidate five centers in the eastern region of the country. The move will allow Little Brown to save 20% to 30% in annual distribution operations costs, Linville estimates.

Companies can save on rent by consolidating into one mammoth distribution facility. Such buildings often are located in large markets where land for construction is plentiful and rents more competitive than in the second-tier markets where many smaller facilities are located.

But savings also can come from reduced trucking and personnel expenses. Industry observers say it's easier to negotiate competitive trucking rates for big centers located in regional hubs than for a series of distribution centers scattered throughout the nation.

“The cost savings of moving from 20 facilities to two is enormous,” Linville says. “And this is what has been driving the move away from lots of small distribution centers.”

Another factor in the emergence of larger distribution centers is that improved computer technology has enabled a center to take on increased processing loads. In the days when such technologies were less advanced, companies were leery of allowing one center to carry too heavy a load.

A new look

Atlanta-based IDI recently built an 832,000 sq. ft. distribution center for Toys “R” Us just south of Dallas. The building features 55 ft. clear ceiling heights.

Meanwhile, The Alter Group of Skokie, Ill., is completing an 835,000 sq. ft. office and warehouse for Thomson Learning Services of Stamford, Conn. Located in the Cincinnati area, the facility will ship and receive educational materials through 38 ft. docking doors. With its new building, Thomson will consolidate three distribution centers into one.

These projects are typical of today's cutting-edge distribution centers. Ceiling heights typically begin at 28 ft. and go as high as the 55 ft. in the Toys “R” Us center.

New distribution centers also feature super-flat concrete floors to prevent rows of tall, specialized racking equipment from listing to one side. Modern forklifts with on-board computers pull pallets of products from arriving trucks, trains, or cargo planes and slot them into numbered racks. Forklift operators enter the location of the product into computers, which transfer the data to a central system.

In the most sophisticated centers, electronic gates programmed by a sophisticated inventory management system might move products down a conveyor to the appropriate dock.

Tenants absorb the cost of the specialized build-out of these properties. As a result, development costs per square foot have remained stable during the shift away from regional networks. “Costs range from $35 to $40 per sq. ft.,” says Thomas O'Donohoe, senior vice president with The Alter Group. “That's higher than five years ago, but not dramatically higher.”

O'Donohoe notes, however, that higher land prices have forced developers to think twice about speculative development and to focus on investment-grade tenants for these mega-properties.

Where to put a center?

The consolidation of distribution networks begs the question: Where should a corporation build its new, mammoth distribution center?

The big considerations are access to quality labor, proximity to major interstates, ports and airports, and competitive occupancy costs. Based on these criteria, regional hubs such as Los Angeles, Chicago, Dallas and Atlanta are popular choices.

“Best logistics practices aim to find the best combination of freight costs, labor costs and warehousing costs,” says Michael Brennan, president and CEO of Chicago-based First Industrial Realty Trust. “Freight and labor are the big costs that dictate location.”

First Industrial has formulated a location strategy that focuses on building in economically diverse markets that feature at least 100 million sq. ft. of existing industrial space and where the barriers to entry are high.

Less distribution land means fewer, more expensive sites for new buildings, but also more difficulty for competitors to move in. Areas with lots of existing industrial space provide the potential for sufficient absorption, Brennan says. “In the big markets, someone is always looking for space,” he says.

Economic diversity means that many businesses need distribution. Using the above criteria, First Industrial has created a list of 25 favored cities for distribution centers.

Smaller centers still meet needs

Despite the growing prevalence of the big distribution centers with tall clear ceiling heights, smaller centers with shorter heights are still very much in use.

“Thirty-foot clearances and super-flat floors imply a focus on storage,” says Luis Belmonte, executive vice president of development for San Francisco-based AMB Property Corp. “The real focus should be on moving goods. Efficient companies do not store products, they move products. In an ideal world, the truck is the warehouse.”

AMB has taken that idea to market with a trademarked development called high-throughput distribution buildings, which feature 24 ft. clearances, plus another 2 ft. for rack space inside the building. “Getting the product up in the air is expensive,” Belmonte says. “You need expensive machinery and skill to do that.”

AMB facilities include asphalt, plenty of doors and shallow depths. “The minimum acceptable size for asphalt aprons used to be 100 ft. wide,” Belmonte says. “Today, you need 120 ft. for 80 ft. rigs to turn around. You also need space to store trailers. In most markets, we won't look at a building deeper than 200 ft.”

The company prefers buildings 300 ft. wide with cross-docks, which Belmonte says are the equivalent of 150 ft. deep buildings.

A recent project for Emery Worldwide illustrates AMB's approach. Emery owned a 56,000 sq. ft. distribution facility near Hartsfield International Airport in Atlanta that could not move product quickly enough. AMB then constructed a 77,825 sq. ft. build-to-suit service center, which Emery now leases.

“It is a genuine cross-dock building, about 100 ft. wide,” Belmonte says. “We also purchased the existing building, rehabilitated it and sold it.”

AMB prefers to develop projects near airports, especially the near so-called “gateway airports” in Chicago, Los Angeles, Miami, New York and San Francisco, according to Walter Byrd, senior director with Cushman & Wakefield Inc. in Miami.

Demand remains for older buildings

The proliferation of product in inventory, known in commercial real estate circles as stock-keeping units (SKU), offsets the efficiencies of mega-distribution centers, says Seiple of ProLogis.

“Today, there are more products in more sizes and in more kinds of packages than ever before. For example, when Coca-Cola put lemon in Coke, they ended up with an additional 58 SKUs — just in the U.S.”

The significance of this increase in product, according to Seiple, is that the overall market for distribution space does not decrease because other distributors in the supply chain also need storage space. That means plenty of takers for older, smaller distribution buildings.

ProLogis recently shifted its strategy in the U.S. from the development of speculative distribution facilities to the purchase of existing properties. “We're in 35 U.S. markets,” Seiple says, “and right now we're focused on building our presence in those markets through acquisitions. Between 1998 and 2000, we spent to develop, not to acquire.”

In 2001, ProLogis spent about $150 million on acquisitions, a total that will increase to between $250 million and $300 million this year. Seiple defines the company's acquisition targets as “B” quality properties with at least 24 ft. clearances in “A” quality markets.

Why would ProLogis buy old properties? Unlike office buildings, distribution buildings can be revived relatively easily. Each time one company buys another company, the new entity reshapes its distribution network, Seiple notes. And every time a company introduces a new product, the distribution network evolves. As a result, corporations always will need to modify existing networks and create new ones quickly.

Mike Fickes is a Baltimore-based writer.

CenterPoint intermodal project caters to rail users

THE ONGOING CONSTRUCTION OF A $1 BILLION distribution park on 2,200 acres south of Chicago is taking the trend of mega-sized industrial facilities to new heights. The CenterPoint Intermodal Center, located 40 miles from downtown Chicago in Joliet, Ill., eventually will house 14 million sq. ft. of distribution space and 3 million sq. ft. of manufacturing space.

Located on the former site of The Joliet Arsenal, the project is surrounded by major railroad lines and highways. “We viewed the Arsenal as a terrific opportunity to build a large industrial park that would serve clients with transportation needs, particularly large rail users,” says Michael Mullen, COO of Oak Brook, Ill.-based CenterPoint Properties Trust. “That's why the site made sense to us.” The site lies between railroad tracks owned by BNSF and Union Pacific.

Construction of the project, which began in August 2000, will take 12 years to complete. The first phase, which consists of a 621-acre intermodal distribution center for Burlington Northern and Santa Fe Railway Co. (BNSF), is slated for delivery this spring.

Federal legislation set aside most of the Joliet acreage for a nature preserve and a national cemetery but designated 1,850 acres for private development. CenterPoint bought that acreage, along with a 350-acre farm abutting the eastern boundary of the site, which allows for easier access to roadways and Union Pacific tracks.

CenterPoint will contribute approximately $650 million of the total expected investment in the park. Government grants and other assistance will contribute about $200 million. Additional funds will come from tenant investments.

The BNSF distribution facility will form the key component of the park. “This property will enable BNSF to improve service for all of our international and domestic intermodal and automotive customers,” says Rob Krebs, chairman and CEO of BNSF. The intermodal facility will initially increase BNSF's lift capacity in the Chicago area by 400,000 units to 2.8 million annual lifts, he added.

Partners Warehouse, a distribution company, has reached a 300,000 sq. ft. build-to-suit deal with CenterPoint and will pay a rent that falls into the range of $3.10 to $3.50 per sq. ft. on a triple-net basis. Also, DSC Logistics of Des Plaines, Ill., has purchased 57 acres on the site. “We have a 1 million sq. ft. building on the drawing board for this park,” says Greg Elliott, director of real estate for DSC. “We like the fact that there is an intermodal yard there, along with access to two separate rail lines and two major interstate highways.” The DSC facility will feature advanced distribution attributes such as 32 ft. high clearances and smooth floors.

CenterPoint currently is negotiating build-to-suit deals with a number of potential tenants. The company also has set aside approximately 70 acres for commercial and retail development deals to bring ancillary services to the site, including a hotel. — Mike Fickes